We also had a chance to visit one of the game's towns, which featured medieval European architecture (stony buildings with thatched roofs) lined by cobblestone roads with patches of grass on the sides. We sidled up to a conversation between a human bard character and a dark elf wearing plate armor. The human bard related the dire news that a portal to Oblivion had opened in a nearby town, and monsters were pouring forth from it and slaughtering civilians. After overhearing this news, we had the attack itself added to our journal as a new dialogue topic, which we were then able to ask the bard about--resulting in a new quest to help at the town added to our journal.
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We watched an example in which we entered a bookstore and chatted up the storekeeper using the game's diplomacy skill (which has been changed from Morrowind to a circle onscreen that lets you move your cursor between options like joke or threaten; the character you're speaking to will react accordingly with facial animations)

So, there you go, dialogues are topic-based, as we've told you many times before. The rest sounds neat though, from FPS point of view.